What the failed GrainCorp takeover bid by ADM means for Australia

GrainCorp's stock and the Australian dollar have both fallen on the back of the Federal Government's surprise decision to block the $3.4 billion takeover of Australia's largest grain handler by US firm Archer Daniels Midland. This morning the move also prompted the resignation of GrainCorp's CEO. Sheryle Bagwell takes a look at the implications of a decision that business groups—and the US Government—warn could undermine the Coalition's claim to be 'open for business'.

............................................................................................................................................................................What would the ADM takeover have meant for Australia?............................................................................................................................................................................

The US food giant had pledged to pump some $500 million to upgrade GrainCorp's ageing rail infrastructure—capital that is now off the table.

An ADM takeover would have seen more of the grain industry fall in foreign hands, but whether we like it or not, Australia has always been dependent on foreign investment to fund our development, which in turn underpins our standard of living by creating additional employment.

Australia simply doesn't have enough capital to do it on its own.

Australia wants to become the food bowl of Asia, but as report after report tells us, it can't be done without masses of capital investment—which will have to come from abroad.

............................................................................................................................................................................How is the business world taking the news?............................................................................................................................................................................

Treasurer Joe Hockey insists this is a special case and sets no precedent. Business—so happy to see off Labor—seem willing to give the new government the benefit of the doubt for the time being.

However, the Business Council of Australia and others—including the US Government—are still seeking assurances from the government that this deal was blocked in the national interest, and not just to appease the farm lobby.

............................................................................................................................................................................What influence did the National Party have on the decision?............................................................................................................................................................................

Whether it’s fair or not, the market is judging this as a political decision made in the National Party’s interest, rather than the national interest.

That's a risk factor that foreign investors and businesses will now have to weigh up before they plunge into the Australian market: will this get past the protectionists in the National Party?

There were legitimate concerns in the rural community about the prospect of the US giant ADM buying up GrainCorp, which is a near monopoly player in the grain industry.

Grain producers feared it would lessen competition, impede their ability to access grain storage and distribution networks and lead to lower prices at the farmgate.

However, the competition regulator, the Australian Competition and Consumer Commission, didn't see it that way. It had waved through the deal.

ADM too had given growers guarantees on pricing and access, although that didn't appear to win over the sceptics.

Foreign investors will not be deterred on the basis of this one decision, but the business and foreign investment community—who had hoped the election of a Coalition government would usher in a new era of economic reform and rationalism, rather than economic nationalism—have been disappointed by this decision.

It was Prime Minister Tony Abbott after all who said Australia was now ‘open for business’, and whether he likes it or not, this takeover bid by ADM for GrainCorp was seen as a litmus test for that commitment.

The government is now being criticised for falling at the first hurdle.

............................................................................................................................................................................Where to now for GrainCorp and its shareholders?............................................................................................................................................................................

Investors and hedge funds certainly ran for the exit on the news on Friday.

Shares in GrainCorp plunged 22 per cent, wiping more than $550 million off the value of the company.

And Joe Hockey’s decision to block the takeover has already clocked its first casualty. On Monday morning, GrainCorp chief executive Alison Watkins announced her resignation. She’s off to Coca-Cola Amatil which is already controlled by the Americans.

GrainCorp is now effectively blocked from foreign takeover until such time as the treasurer judges that the industry can cope with it.

The Chinese were said to be circling GrainCorp too, but if the government won't agree to a takeover from a US company, they are not going to countenance any bid from China.

Meanwhile, Treasurer Joe Hockey has thrown a bone to ADM saying he will allow the company to lift its stake in GrainCorp to 25 per cent if it wants to stick around..

That means ADM gets to move up to a position of influence on the GrainCorp share register without paying a premium for the privilege—another blow for GrainCorp shareholders.

ADM hasn't indicated yet whether it will stay or go, so until it makes up its mind, there will be an overhang of shares that will continue to weigh on the Graincorp share price for the foreseeable future.

It’s little wonder GrainCorp chairman Don Taylor described the treasurer's blocking of the bid as a ‘disappointing’ move that would have ‘enduring implications for shareholders and the industry’.